Natural capital valuation
Amongst the new changes to the economy over the last decade, a change that’s accelerating is the valuation of natural capital.
Originally a term invented by environmentalists it’s increasingly taking on a financial element that’s important to many businesses. What is natural capital? Simply, it’s the value of natural environment, much of which we used to just expect to use or take for free (except for the cost of extraction).
A few examples:
Use of the air: an emissions trading scheme was introduced in New Zealand in 2010 that created new property rights of NZ$20 billion. In Australia, the carbon tax currently being introduced is expected to initially raise AU$25 billion per annum, and then over time be converted into a bigger emissions trading scheme.
Use of water: in Australia a discussion paper put out by the Treasury says that “water is an important input to almost every industry”; and that there is an ongoing water reform agenda. Likewise in New Zealand, the Ministry of Economic Development, in a review of the value of water to industry, notes the productive value of water was measured at 20 – 25 NZ$billion per annum. Like Australia, New Zealand is now facing increasing conflicts between users and water reform initiatives such as for farmers on the Canterbury plains.
In the literature developing on natural capital internationally there’s a wider range of values being placed on natural resources which have never been realized widely in the past and aren’t intuitive to the onlooker like you or me.
A native forest, for instance, which traditionally economically has been seen as a source of timber and when that’s removed, agricultural land, has had a whole range of new services and products attached that can, and are, being valued.
Forest services include reducing the likelihood of floods as they absorb water (agricultural and people protection). They clean the air, purify water, they prevent soil erosion, provide tourism opportunities, and improve aesthetics and living conditions.
A study of forests in the Bejing municipality of China, valuing these new types of services and products, valued their annual output at 5.3% of GDP in 2007 (study by S. Wu, Y. Hou and G. Yuan). Another study in Canada valuing the services of the Boreal Forest, found the value of the forest was US$3.7 trillion. The annual value of services provided by the forest was US$93.2 billion.
Natural capital valuation studies are blossoming all over the world and being run with calculated values coming up on things as diverse as coral reefs, wetlands, and marine eco-systems.
What’s driving all this? The answer is pretty simple. As the world population keeps growing, it’s forecasted to rise from 6 billion people now to 9 billion in 2050 – and the stock of natural capital diminishes because we all have to use resources – values of those hitherto free resources, become enlarged. Scarcity increases. The services and products which are provided by natural capital are becoming more visible and prices (as is happening now with carbon, fish stocks and starting to happen with water) start to be attached, and will rise if scarcity and demand increases.
My view on all this is it’s not something we should fight as business people. It’s part of reality that we are going to have to work with. At the same time as some businesses may face costs and changes in how we do business, there are also going to be tremendous opportunities.
One way we can work in tune with business growth, and supporting the natural environment which we all need, is to get ahead of the curve. Look at what natural capital values are high (services and products the environment provides), and may be unvalued or undervalued at present, and make the changes or investments in that important natural capital before regulators or society come calling and insist that it be done.
Those who got ahead of climate change haven’t been pinged by it compared to those that haven’t. Those who planted trees in countries introducing emissions trading schemes like New Zealand are seeing massive financial windfalls. Those investing in water conservation may be in a windfall situation to those that have used it like it’s an endless free resource and now find its not. Those that have got on top of energy efficiency will be sitting pretty now compared to those that haven’t, and so on.
These types of valuation changes are an inevitability unless there is some major shift, downward, in population, which is highly unlikely. It is not a question of if, but a question of when and what natural resource services and product will be valued, and for how much. Many of these changes aren’t in the media at present, often the valuable services and products provided by natural resources you probably haven’t even thought of before, but they are coming.
Roger Parker, Director, New River Limited
Postscript:
Reported by the Huffington Post 20 July 2011: "In a study by the Australian Institute of Marine Science, they estimated that the annual value to the tourism industry of an individual reef shark that swims through these sites was $179,000, or $1.9 million over its lifetime. If a poacher kills a single reef shark, it would only bring an estimated $108."